Glencore concessions to China expected for Xstrata deal

Clara Ferreira-Marques

5 Min Read

LONDON (Reuters) - Trader Glencore is expected to agree to concessions this week to ease Chinese worries over its grip on the supply of copper, clearing the final regulatory hurdle in its $32 billion acquisition of miner Xstrata.

The logo of commodities trader Glencore is pictured in front of the company's headquarters in the Swiss town of Baar November 20, 2012. REUTERS/Arnd Wiegmann

After months of negotiations, Glencore is expected to have agreed to yield some ground, with analysts and market sources pointing to a likely sale from among Xstrata’s promising - though challenging - greenfield copper projects, which could include Las Bambas in Peru, due to begin production in 2015.

Industry sources said a solution might also involve giving China a guaranteed slice of the group’s copper production.

Xstrata is already the world’s fourth-largest producer of copper and aims to increase output by more than 50 percent from 2011 levels by 2015, as projects like the $5.2 billion Las Bambas mine ramp up.

Xstrata and Glencore combined account for around 7 percent of global copper supply, a percentage expected to rise, with mines in Chile, Peru, Australia and in emerging regions like Africa’s copper belt.

As a result, Chinese regulators reviewing the biggest ever mining tie-up have focused on the new group’s presence in the red metal, and specifically copper concentrate, the intermediate product that feeds smelters and refineries.

Though China’s Ministry of Commerce (MOFCOM) has only rarely imposed conditions on deals, China is the biggest buyer of the minerals Glencore and Xstrata trade and mine. Its regulator - the only major global watchdog with an overtly political brief - is not deaf to the country’s hunger for copper, or to its ambition to process more of the metal at home.

“It is about value and political capital, rather than about just repairing the market,” said analyst Paul Gait at Sanford Bernstein in London.

“Clearly the Chinese are short of copper and iron ore - and those they care a lot about, and iron ore is not an issue for Glencore Xstrata.”

The European Union’s decision to require action is also said to have emboldened China. Regulators in Brussels demanded Glencore scrap an exclusive European zinc sales agreement with producer Nyrstar and sell its equity stake.

MONTHS OF TALKS

Lengthy negotiation periods are not unusual for MOFCOM, the newest and least predictable of the world’s main watchdogs, and Glencore’s decision to pull and refile its submission on the Xstrata tie-up late last year and its own comments about Chinese interest in copper have left little doubt that some ground will have to be conceded.

China has only imposed sales to ease market dominance in a handful of cases out of several hundred mergers reviewed since 2008, in deals relevant to its growth ambitions.

In one case often compared with Glencore Xstrata - the acquisition of Russian potash producer Silvinit by rival Uralkali in 2011 - MOFCOM imposed conditions on supply, as well ordering the group to maintain existing sales procedures and price negotiations.

Market and industry sources said assets like Glencore’s African hub and Xstrata’s producing mines were unlikely to be up for negotiation, though the group could review minority stakes, such as Xstrata’s portion of Peru’s Antamina operation.

More likely to be sacrificed are Xstrata greenfield projects, like Las Bambas, set to produce more than 400,000 tonnes of copper a year for at least its first five years of production, from 2015.

Glencore could offer up Xstrata’s unapproved, longer-dated projects like the $5.9 billion Tampakan mine in the Philippines, where production has already been pushed out to 2019. Glencore has made no secret of its reluctance to invest in projects being built from scratch, as risks and costs increase.

Alternatively, the Chinese - who could also impose conditions on the combined group’s commercial behavior - could simply secure a chunk of the group’s production.

“If I were the Chinese, I wouldn’t want the mine at all, just volume,” said one industry source. Buying directly allows China to bypass the metal exchange, and avoid driving up the price for itself.

If China reaches a deal with Glencore and makes its verdict known this week, Glencore will be able to meet its revised completion deadline of May 2.